Clinton in Japan


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Isn’t this sweet???

Clinton, in Japan, talks of ‘harmony’ in US policy

by Arshad Mohammed

Feb 17 (Reuters) — U.S. Secretary of State Hillary Clinton spoke on Tuesday of promoting “balance and harmony” in U.S. foreign policy as she visited Japan, drawing an implicit contrast to the administration of former President George W. Bush.

Clinton began her first full day in Asia with a visit to Tokyo’s Meiji shrine, where she took part in a purification ceremony at the Shinto shrine dedicated to Emperor Meiji, considered the father of modern Japan.

Yes, a US democrat honoring emperors and royalty.

Making her first trip as secretary of state, Clinton plans to consult Japanese officials on how to deal with the global financial crisis,

If she has any ideas why hasn’t she told us?

North Korea’s nuclear programs and the war in Afghanistan, a legacy of the Bush administration.

“I started this morning at the Meiji shrine and was talking to the head priest there who told me about the importance of balance and harmony,” Clinton told about 200 U.S. diplomats and their families at the U.S. embassy.

“It’s not only a good concept for religious shrines, it’s a good concept for America’s role in the world,” she added, without citing Bush by name or the U.S.-led invasion of Iraq, which polarized global opinion. “We need to be looking to create more balance, more harmony.”

Reads like she’s broadening her religious beliefs???

“We’re going to be listening but we’re also going to be asking for more partnerships to come together to try to work with us to handle the problems that none of us can handle alone,” Clinton added, referring partly to the global financial crisis.

Partnerships to do what? No secrets, please!

Japan has been especially hit hard by the economic slowdown. Its economy shrank in the final quarter of 2008 at the fastest rate since the first oil crisis in 1974, and economists bet on another big contraction in January-March.

“These are hard times economically for the Japanese people, just as it is in many places around the world,” Clinton said. “I am absolutely confident we will navigate our way through these difficulties.”

The blind leading the blind, but this time holding hands?

China next…


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The euro falls again


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Each time the euro falls like it has done over the last several days suspicions arise that ‘this is it’ and it’s on the way towards 0, with a wholesale exit by individuals and institutional investors afraid of everything from inflation to a total breakup of the currency union.

The cross currents are enormous, and the range of predicted outcomes wide.

What’s sure as always is in the end someone will have had the right forecast, but it will be because of ‘statistics’- the forecasts cover all possibilities- or maybe inside information, but not greater wisdom.

Partial list of cross currents:

Euro positive:

  • The eurozone has relatively tight fiscal policy, with no proactive fiscal package of consequence. This keeps the euro strong, and promotes deflationary domestic conditions as the economy tries to export to gain needed financial assets.
  • Fed swap lines tend to support the euro vs the dollar, as institutions that otherwise would need to sell euros and buy dollars to cover dollar losses can instead buy time and borrow them cheaply via the swap line arrangement. This kept the region from collapse in the fall.

Euro negative:

  • The dollar losses don’t go away with the swap lines, unless dollar asset prices and credit quality improve, which has not been the case. So any euro strength tends to see sellers of euro vs dollars to cover some of the losses.
  • In a breakup of the eurozone there is a risk euro securities get redenominated to the new national currencies which may be subject to high levels of deficit spending to support domestic demand and promote high inflation, high interest rates, and falling currencies as in the past.
  • Euro governments could default and payments be suspended indefinitely.
  • Bank deposits could be frozen indefinitely with major bank failures too large for any national govt. to politically or even operationally write the check.
  • The low price of crude supports the dollar by keeping dollars ‘hard to get’ for the foreign sector.

The exit from the euro includes those who buy gold, which has been driving gold to extremes vs other commodities even though you can’t eat it and it doesn’t pay interest, and it’s been a very long time since it was what you needed to pay taxes.

This is a major bubble in progress that ends in a very sharp collapse when the buying has run its course, and as those owning gold need it for payment purposes and begin to sell.

Along with the real buyers who are exiting the euro (and other currencies) are the usual specs and trend followers who exacerbate every trend on the way up and the way down.

And the fact remains that all the ‘money’ in the world is nothing more than spread sheet entries of what is needed to pay taxes.

And there aren’t a lot of practical alternatives to storing ‘wealth’ apart from inherently worthless gold, and various forms of ‘property’ that can all be taxed and therefore demands currency for payment.

Ironically, it is a spreadsheet crisis- there is no shortage of real resources- and therefore readily ‘fixed’ by the right data entry by governments on their own spreadsheets.

For the US that means something like:

  1. A full payroll tax holiday where the treasury makes all payments for employers and employees- why are we taking $1 trillion per year from workers and business struggling to make their payments?
  2. $300 billion to the states on a per capita basis with no strings attached- the per capita distribution concept removes the need for specific federal oversight.

Those two spreadsheet entries would end the ‘crisis’ in very short order.

And a government funded $8/hour job for anyone willing and able to work begins to replace the current unemployed labor buffer stock with an employed labor buffer stock, which is both a superior price anchor and potentially a source of increased useful output and reduction of the high real social costs of our current system.

But deficit myths are likely to remain the obstacle to making the spread sheet entries readily available to restore output and employment.

The latest ridiculous bit of non sense is that government borrowing takes ‘money’ from one place and puts it in another.

Government deficit spending adds exactly that many NEW ‘bank balances’ to non government financial assets, and government borrowing subsequently offers those NEW, ADDITIONAL bank balances CREATED BY DEFICIT SPENDING alternative financial assets called Treasury securities.

At the end of the day there are NEW financial assets called Treasury securities added to the existing stock of financial assets in the non govt sectors by federal deficit spending.

Spread the word!


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Hong Kong currency board reserves at risk


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Hong Kong’s currency board arrangement requires net exports to fund domestic net financial assets (‘money supply’) needs that other nations get ‘free’ from their deficit spending.

Net Hong Kong dollars can be had only by buying them from the monetary authority with USD, etc.

With exports markets collapsing, the direct result for Hong Kong is a deflation of costs of exports that doesn’t stop until exports resume at levels sufficient to fund the domestic need for net financial assets.

Bank deposits can not be insured by the monetary authority without threatening the solvency of the monetary authority as bank deposits necessarily exceed monetary authority reserves.

So, the move to guarantee deposits is only a temporary fix limited by the reserves of the monetary authority.

A currency board advocate would oppose insuring bank deposits and would let the currency board arrangement work itself out via the deflation route.

While theoretically correct, the deflation process is politically unacceptable as it drives real wages towards zero in a process that ends only when exports resume.

Hong Kong’s attachment to its currency board system that makes it fully dependent on net exports just to fund itself means it will continue to be hit particularly hard by the collapse in export markets.

Best I can tell the currency board arrangement was designed by England to force net exports from its colonies.

Bank of East Asia Posts First Loss in Four Decades

by Kelvin Wong

Feb 17 (Bloomberg) — Bank of East Asia Ltd., the Hong Kong lender that suffered a run on deposits in September, had its first loss in at least four decades after writing down the value of credit-market investments.

The HK$855 million ($110 million) deficit for the six months ended Dec. 31, derived by subtracting first-half earnings from full-year numbers reported by the company today, compares with profit of HK$2.26 billion a year earlier.

Chairman David Li said he’ll “fast track” measures to cut costs after expenses rose 23 percent last year and bad-loan charges more than doubled. Bank of East Asia’s shares tumbled 61 percent in the past year, and the September run on the lender spurred Hong Kong’s central bank to guarantee all bank deposits.


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Re: The pressure increases on the eurozone


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These types of articles have gotten respectable and are getting more strident by the hour.

I do think a banking crisis where the national government can’t or won’t write the check freezes the entire payments system, as no one will want to keep any funds in a eurozone bank, nor will they have anywhere to go other than actual cash.

Gold had been benefiting by all this, but looks to me like a major bubble that breaks when the eurozone resolves itself one way or another.

>   
>   On Mon, Feb 16, 2009 at 5:27 PM, wrote:
>   
>   Even the euro enthusiasts are now starting to contemplate the break-up
>   of the European Monetary Union, which basically would finish the euro.
>   This problem is becoming evident to more people in the euro zone, but
>   not reflected yet in policy:
>   

Narrow-minded leadership hurts Europe

by Wolfgang Münchau

Feb 15 (Financial Times) — “It is justifiable if a factory of Renault is built in India so that Renault cars may be sold to the Indians. But it is not justifiable if a factory … is built in the Czech Republic and its cars are sold in France” – Nicolas Sarkozy, president of France.

This is a troubling statement indeed. But instead of launching a tirade against Mr Sarkozy, I would like to make an observation that is perhaps not immediately evident: his statement is entirely consistent with the way the European Union has reacted to the financial crisis.

To see the link between crisis management and the rise in protectionism, look at the initial policy response to last September’s financial shockwaves. European leaders have woefully underestimated the crisis and possibly still do. The European economy is now heading towards a depression, with German gross domestic product falling at an annualised rate of almost 9 per cent. The early misjudgment of the crisis resulted in stimulus packages with two defects. They were initially too small but, more importantly, they were not co-ordinated. One important aspect of the economic meltdown is the presence of strong cross-country spillovers, both globally and inside the EU. The policy response failed to take account of these spillovers.

For the bank bail-out programmes, the EU managed to set a minimum level of competition rules, but these programmes, too, were national and not co-ordinated. So how does the combined effect of these two unco-ordinated responses lead to protectionism?

If stimulus money is dispersed at national level, governments naturally try to make sure that the money stays inside their countries. The prospect that consumers might spend the money on imported goods was one of the reasons why eurozone governments were reluctant to cut taxes. Because of EU competition rules, the same logic also applies to government purchases. Under those rules, governments had to open public projects to EU-wide tenders. If you play by the rules, keeping the cash in your country is not easy.

Governments have since relaxed those rules. In other words, if you want to make sure that these programmes function in their warped way, you have to dismantle the single market. The same logic applies to the bank rescue packages. If the European Commission tried to block each uncompetitive bank rescue, it would be blamed for causing a financial collapse. Governments have found a way to circumvent the EU, by breaking so many rules at once, that the Commission cannot even begin to react effectively.

Expect to see three effects with progressively destructive force. The first is that the stimulus is much less effective than it could otherwise have been. When everybody tries to gain a competitive advantage over each other, the effects usually cancel out.

Second, the stimulus and bank rescue packages harm the single European market directly. The French subsidies are more blatant, as is the protectionist rhetoric of its president. But everybody in Europe plays the same game. It is not as though the single market is the default position for European commerce. Much of the service sector is exempted. Europe lacks an effective pan-European retail infrastructure and retail banking system. Reversing this programme long before it is completed would be a mistake.

Third, and most destructive, the combined decision on stimulus and financial rescue packages poses an existential threat to monetary union. A blanket loan guarantee to every bank, as most governments have granted, in combination with indiscriminate capital injections and a reluctance to restructure, will mean the transformation of private into sovereign default risk – aggravated further by the economic downturn. Some insolvent banks are now owned by the state, while the bulk of damaged, not-yet-insolvent banks are lingering on, hoarding cash. This programme is a drain of resources with no resolution in sight.

I would now expect several eurozone countries with weak banking sectors to get into serious difficulties as the crisis continues. There is a risk of cascading sovereign defaults. If this was limited to countries of the size of Ireland or Greece, one could solve this problem through a bail-out. But solvency risk is not a problem confined to small countries. The banking sectors in Italy, Spain and Germany are increasingly vulnerable.

When European leaders meet for their anti-protectionism summit on March 1, they will produce warm words to reaffirm their commitment to the single market. I suspect they will continue to misdiagnose the crisis. Protectionism is not the root of the problem. The protectionism we are experiencing now is caused by co-ordination failure. It is neither sudden, nor surprising.

The right course would be to solve the underlying problem – to shift at least some of the stimulus spending to EU or eurozone level and, ideally, drop those toxic national schemes altogether and to adopt a joint strategy for the financial sector, at least for the 45 cross-border European banks. But this is not going to happen. It did not happen in October, and it is not going to happen now. As a result of the extraordinary narrow-mindedness of Europe’s political leadership, expect serious damage to the single market in general and the single market for financial services in particular. As for the eurozone, I always argued in the past that a break-up is in effect impossible. I am no longer so sure.


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Crude oil prices


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I believe the Saudi guy:

Qatar energy official: OPEC willing to cut output

by Adam Schreck

Feb 15 (AP) — A senior Qatari energy official said Sunday that OPEC is watching the oil market closely and stands ready to cut output further when it meets next month.

Mohammed Saleh al-Sada, Qatar’s minister of state for energy and industry affairs, told reporters on the sidelines of a conference in Doha that the Organization of Petroleum Exporting Countries “will respond appropriately” to the rapid drop in oil prices.

“If there is a need, actually, to go down, they will not be hesitant to reduce it further,” he said, without saying by how much.

The oil-producing group, he said, was facing difficulties in setting output because of the “unusual situation” of extreme fluctuation in prices. “The volatility is huge,” said al-Sada.

Al-Sada said a “reasonable price” for oil would be $70 a barrel -well above the $37.51 benchmark light, sweet crude settled Friday.

In Kuwait, however, a senior oil official said crude prices are unlikely to rise above $40 per barrel, even if OPEC decides to cut as much as 2 million barrels per day at its meeting next month.

Moussa Marafi, a member of the Supreme Petroleum Council, Kuwait’s highest oil policy-making body, told Annahar newspaper in comments published Sunday that oil prices are being pressured by surging U.S. crude inventories and a lack of compliance to quotas by some OPEC members.

The comments come a day after the oil minister of Venezuela, a traditional price hawk, said it would support new production cuts. Oil Minister Rafael Ramirez said the group is worried because commercial inventories are still «very high.

OPEC members have agreed to slash production by 4.2 million barrels from September levels in an effort to put a floor beneath prices that have tumbled by nearly three-quarters from the record highs they hit over the summer.

The group, which produces about 40 percent of the world’s oil, said last week it has completed about 80 percent of those previously agreed cutbacks.


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Obama on the auto industry


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How about restoring aggregate demand and car sales with a full payroll tax holiday and $300 billion for the states on a per capita basis?

What good will financial support for the autos do if car sales keep falling due to overly tight fiscal policy???

Obama to appoint panel for auto recovery

by Ken Thomas and Tom Krisher

Feb 15 (AP) — President Barack Obama will form a government task force for restructuring the struggling U.S. auto industry instead of naming a “car czar” with sweeping powers, a senior administration official said.


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Clinton trying to get Asians to increase demand


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A once in a lifetime opportunity to increase the US standard of living squandered.

Increasing domestic demand unilaterally and letting the rest of the world grow via net exports to the US is in our best interest.

Clinton begins Asia trip, calls for Global Economic Cooperation

by Indira A.R. Lakshmanan

Feb 16 (Bloomberg) — Secretary of State Hillary Clinton kicked off the start of a weeklong trip to East Asia by calling for more cooperation from the region in alleviating the worldwide recession.


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Re: Proposals for the eurozone


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(email exchange)

>   
>   On Mon, Feb 16, 2009 at 8:12 AM, Morris wrote:
>   
>   What would you do for Europe?
>   

For Europe:

  1. The European Parliament or ECB has to be given fiscal authority and give the national governments a check for maybe 1,000 euro per capita to be used for general purposes.
  2. This new fiscal authority would also provide deposit insurance for all the euro banks and lend to member banks on an unsecured basis.
  3. It would also regulate and supervise the banks.
  4. I would have the new fiscal authority fund jobs for anyone willing and able to work at a fixed wage, which, via market forces, would become the minimum wage.


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Deficit myths are the problem


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Yes, that’s the problem, output and employment can be restored relatively quickly with the right fiscal adjustment, but deficit myths are in the way.

A full payroll tax holiday and $300 billion to the states on a per capita basis with no strings attached would very quickly restore demand, including retail sales and home sales, which would be quickly followed by continuing employment and output gains.

No Ordinary Recession

by Axel Leijonhufvud

Feb 13 (Voxeu) — “Fiscal stimulus will not have much effect as long as the financial system is deleveraging. Even if that problem were to be more or less solved, the government deficit would have to offset both the decline in industry investment and the rise in household saving – a gap that is rising as the recession deepens. Here, too, the public is sceptical and prone to conclude that a program that only slows or stops the decline but fails to “jump start” the economy must have been a waste of tax payers’ money. The most effective composition of such a program is also a problem.”


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